Compute the value of a share of common stock of a company whose most recent dividend...

Compute the value of a share of common stock of a company whose most recent dividend was $2.00 and is expected to grow at 6 percent per year for the next 2 years, after which the dividend growth rate will decrease to 3 percent per year indefinitely. Assume a 12 percent required rate of return.

Expert Solution

	i	ii	iii	iv=i+iii	v	vi=iv*v
year	Dividend		Terminal value	Cash flow	PVIF @ 12%	present value
1	2.12	2*106%		2.12	0.892857	1.89
2	2.2472	2.12*106%	25.72	27.97	0.797194	22.29
				30.09		24.19

therefore price today =			24.19


Computation of terminal value =			=dividend in year 3/(required rate - growth rate)
			=2.2472*103%/(12%-3%)
			25.72

jeff jeffy answered 9 months ago

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